Fidelity Magellan on Its New Course

Editor's note: This is the first in a series of articles examining the 20 largest no-load stock funds.

No mutual fund has garnered more attention for its sheer size than Fidelity Magellan. Under Peter Lynch's management from 1977 to 1990, the fund achieved a staggering 29% annualized return. On average, Lynch trumped the returns of Standard & Poor's 500-index by 13 percentage points a year. As Magellan’s returns advanced, so did its assets. During Lynch's reign, the fund grew from $20 million to $13 billion.

A lot has changed since Magellan's golden age. Lynch’s immediate successors, Morris Smith and Jeff Vinik, continued to outpace the stock market. But under Vinik’s replacement, Robert Stansky, Magellan morphed into a swollen closet index fund -- that is, a fund that was hard to distinguish from the S&P 500. Magellan, which has been closed to new money since 1997, returned 7% annualized over the past decade, lagging 62% of funds that invest in a blend of companies with both growth and value attributes. That's about one percentage point a year less than the return of the S&P over that period.

Magellan’s asset base swelled to $100 billion in 1999. But today it stands at just $45 billion -- the result of losses incurred during the 2000-02 bear market and a steady stream of shareholder redemptions (including both load and no-load funds, Magellan is now the 10th largest stock fund).

Today, Magellan is an entirely different animal. It is run by Harry Lange, who took over in October 2005 after building a stellar record over nine years at Fidelity Capital Appreciation, a go-anywhere fund with a tilt toward growth stocks.

Lange immediately repositioned Magellan as a growth fund. Soon after taking over, he ditched many of Stansky's stodgy blue chips -- such as Altria (MO) and Pfizer (PFE) -- and replaced them with racier fare, such as Google (GOOG) and UnitedHealth Group (UNH). "Almost all the bets I make are in riskier companies," Lange says. Indeed, over the past year Magellan was about 60% more volatile than the S&P 500.

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Lange likes to bet on leaders in growing industries such as technology, biotechnology, health care and specialty retail. As of September 30, the last date for which holding data is available, Corning (GLW) and Nokia (NOK) represented Magellan's biggest positions. And as he did at Capital Appreciation, Lange has committed some of Magellan's assets to high-growth companies abroad. Japan's recovering economy, in particular, caught Lange's eye. The fund recently had about 20% of assets in foreign companies, including 7% in Japanese names.

Lange shot out of the starting gate strongly during his first six months at Magellan but was blindsided during the stock market's May-June pullback in May (and continued to lose ground in July). Looking to beef up the quality of their holdings, many investors began abandoning the riskier stocks, particularly in tech and energy, that Lange had added to Magellan. Says Lange: "It's been an unusual market. I wouldn't have thought that energy stocks would correlate with technology stocks, but it's turned out that way. Things I thought would hedge against each other didn't."

But Lange says he's not about to abandon a strategy that has served him well over the years. "I've seen this happen before -- that's why I'm not panicky,

and I'm stepping up my bets," he says. Lange says he's taking advantage of attractive values among growth stocks. "I've never gotten growth this cheaply compared with the market," he says. "This is the most extreme I've seen in running growth funds for the past ten years."

Lange says that managing a $45-billion fund isn't much different than managing Capital Appreciation, which had $7 billion in assets when he left it (and $8.4 billion today). "The styles are the same," he says. "There are small differences, but the core of the fund is in the same range, and holdings are in the same area." Lange has even said he believes Magellan can handle more assets. (Fidelity says it has no current plans to re-open the fund to new investors.)

Although Lange hasn't yet succeeded in mending Magellan, we're not ready to pronounce his term a failure. In fact, given his superb record at Capital Appreciation, Magellan's slimmer size and brighter prospects for shares of large growth companies after seven years of sub-par performance, we advise current shareholders to BUY Magellan.

View updated data for this fund and compare the performance of the 20 biggest no-load stock funds.